NFRA Board approves overhaul of 40 auditing standards amid ICAI reservations

By CNBCTV18.COM |  Nov 13, 2024 6:08 PM IST (Updated)

The National Financial Reporting Authority (NFRA) has approved 38 out of 40 proposed standards on auditing (SAs), based largely on recommendations from the Institute of Chartered Accountants of India (ICAI), for formal notification under Section 143(10) of the Companies Act, 2013.

However, ICAI has raised significant concerns regarding two key revisions—SA 600 and SA 299—warning that these changes could present challenges for auditors in India.

At NFRA’s meeting on 11-12 November, the 40 proposed standards, covering key areas like quality management (SQM 1 and SQM 2) and revisions to SA 600, SA 299, and the SA 800 series, were reviewed. While NFRA approved most standards with minor amendments, ICAI voiced strong reservations on SA 600 and SA 299, suggesting that these changes may not suit the specific needs of the Indian audit sector.

Key points of contention raised by ICAI

SA 600 (revised) – Group audits

ICAI opposed the revised SA 600, which aligns with International Standard on Auditing (ISA) 600. The revised standard places full responsibility for the group’s entire financial statements on the group auditor, which ICAI argued is impractical for India’s complex audit landscape.

The revised SA 600 is intended to apply to public interest entities (PIEs) as defined under Rule 3 of the NFRA Rules 2018, with exceptions for public sector enterprises, banks, insurance entities, and their branches.

ICAI believes the existing SA 600 standard is sufficient with only minor updates and cautions that aligning with the international standard may overlook local conditions and potentially overburden auditors.

SA 299 (revised) – Joint audits

ICAI also raised concerns over SA 299, which governs joint audits and shifts from ICAI’s model of divided responsibilities among joint auditors to one that emphasises shared responsibility and mandatory cross-review of each auditor’s work.

ICAI believes this change could lead to unnecessary duplication of work and increased costs, particularly in complex joint audits. ICAI has proposed that, before adopting SA 299, NFRA open a public consultation process, allowing stakeholders to review and respond to the substantial changes, as is common practice in standard-setting globally.

Additional standards approved by NFRA

NFRA also approved the quality management standards (SQM 1 and SQM 2), which focus on quality management at the firm level. While ICAI acknowledged the importance of these standards, it highlighted that they should ideally be categorised separately from regular auditing standards, as they relate to firm-level quality control rather than individual audits.

The SA 800 series, covering audits in specialised areas, was also approved by NFRA. ICAI regards these as not typical auditing standards, but NFRA has included them in the general auditing framework for consistency.

In addition to SA 600 and SA 299, NFRA made minor amendments to align other standards with the Companies Act, 2013. A notable adjustment includes setting an eight-year record retention period, in line with Indian regulatory requirements.

Nomenclature and timeline for implementation

NFRA plans to rename the standards on auditing as “Ind SAs” to align with India’s financial reporting standards (Ind AS). The new standards are scheduled to take effect from 1 April 2026, allowing audit firms and stakeholders ample time to familiarise themselves with the changes.